About Private Company Share Valuations

Private company share valuations are required in a number of circumstances and unless there is a third party sale of the entire company the value needs to be determined for the purposes of paying tax on the disposal or transfer of shares and establishing the liability.

As there is no ready market quoting the price of the shares, the process of valuing a private company can be a challenging one. It is generally accepted that there is no single correct way of valuing the shares of a private company but by building an in-depth understanding of the company and the market it operates in, a valuation specialist will be able to assist in arriving at a reasonable estimate of the value of your business.

When are share valuations required and how we can help

Generally, share valuations are required for the following reasons:

• Commercial valuations – required for buying or selling the company, transferring or gifting shares, buying back shares held by a shareholder, corporate restructuring including demergers, management buyouts, share reorganisations and bringing in employees.

• Probate valuations – to enable executors to fulfil their duties in distributing the estate and for submission to HMRC to agree the valuation in relation to company’s shares.

• Share scheme implementation – obtaining advance agreement with HMRC as to value before issuing EMI share options to employees.

• Expert witness statements – required for matrimonial disputes and shareholder disputes.

We are a highly experienced team of corporate tax specialists. Our experience means we can advise and assist not only on the valuation work but also on the various transactions requiring a valuation as described above.

Approach for valuing shares in private companies

The starting point is to check the articles and shareholders agreement as in some cases these documents set out the formula to be applied in valuing the company. However, for many share transactions the value is negotiated on a case by case basis.

The job is made difficult by the fact that there is little published data available relating to private company share transactions as this is confidential to the shareholders concerned. There are no fixed rules and with multiple valuation methodologies to consider, experts, including HM Revenue & Customs Valuation team, will likely arrive at different conclusions when presented with the same facts and information available. By its very nature, valuation work is subjective and the conclusions arrived at will necessarily involve the exercise of judgement.

The reason for the share transaction should be understood together with a detailed understanding of the company as this will determine which valuation methodology is most appropriate in the circumstances ultimately influencing pricing.

Type of valuation methodology to be used

There are five main types of valuation methodology used to establish the valuation of shares in a private company:

• Earnings basis – This is the most common method adopted to value trading companies. It considers the future maintainable earnings of the company by applying weights to the adjusted historic results and multiplying these by an appropriate multiple to arrive at the present value of the company. Such multiples are compiled from published comparable data and are chosen based on company sector, size and status.

• Net asset basis – An asset based valuation is generally most relevant where it is considered that the going concern value of the business may be less than its liquidation value. It is appropriate for the valuation of property holding companies or investment companies, as well as for businesses with high net asset values but low rates of return.

• Dividend basis – A dividend yield valuation is applicable to the valuation of non-strategic minority shareholdings in going concern companies where the shareholder has no influence in the company and where they rely on dividends being paid out. The dividends basis looks at the company’s past dividends, dividend growth patterns, fluctuations and the likely dividend policy going forward.

• Based on recent share transactions – It is important to consider any recent share transactions and the price paid per share in relation to shares issued or sold, generally in the previous 12 months, as this will often set a precedent for the valuation of private company shares.

• A combination of the above basis – It is very common to calculate a value based on a multiple of future earnings, adjusted for ‘extra’ net assets, for example, market value of freehold property, Intellectual property and surplus working capital, held in the business.

Other factors to consider

When considering the value of the shareholding the full company value may be discounted to reflect certain aspects as follows:-

• Size of shareholding – it is important to consider the size of the shareholding as minority shareholders have minimal voting rights and therefore very little influence on the management of a company. Minority shareholding discounts can vary enormously depending on the size of the shareholding and range from anything from around 5% to 80% depending on the facts.

• Class rights – consideration should be given to the rights attached to the shares. Shares with voting rights have inherent value as voting power offers influence over how the company is managed and the profits distributed. Generally a shareholding of 51% and above is presumed to have control over the company’s affairs unless it can be shown otherwise. Shares with dividend entitlement which is fixed, for example, preference shares, increases the value of the shares. As with voting rights, the greater the entitlement to the company’s capital, the higher the value of the shares.

• Marketability and transferability – this will influence the value of the shares as shares that have restrictions applied to them, for example, who they can be transferred to, will decrease the value of the shares as the marketability of the shares is low.

Conclusion

Valuing private companies is complex due to limited financial information and the unique characteristics associated with such companies. There are various challenges to overcome including understanding the key factors influencing the value, which methodology to use, what multiple is acceptable and what discount to apply to the full company value. By considering these aspects and having a good understanding of the business being valued and the markets it operates within will enable a valuer to arrive at a reasonable estimate of your business

Get In Touch

Please do contact your local Whitings Office if you would like further information on any aspects discussed in respect of valuations of private company shares or the various transactions requiring a valuation mentioned above.

Disclaimer - All information in this post was correct at time of writing.